Three Wall Street analysts praised DraftKings for its impressive second-quarter results, though two remain unconvinced now is the time to buy the stock.
DraftKings stock initially popped on the unexpected adjusted EBITDA growth reported Aug. 3, but by Monday morning it was giving back those gains and then some.
Then the stock took a tumble Wednesday, falling more than 10% from Tuesday’s closing price in reaction to Penn Entertainment announcing its partnership with ESPN for ESPN Bet. DraftKings and ESPN were reportedly close to a “large new partnership” last October, according to Bloomberg.
Truist upgrades DraftKings to buy
Barry Jonas of Truist upgraded DKNG from hold to buy, with a $44 price target.
The path to significant and sustainable profitability is “clearer” and DraftKings’ “training wheels” are finally off, Jonas said.
The move from hold is based on three points, he said:
- More rational promotional and marketing environment came earlier than expected
- Both FanDuel and DraftKings are still gaining market share, but it looks like DraftKings is narrowing the gap with FanDuel
- Structural hold improvements with a higher parlay mix
Analysts maintain hold rating for DraftKings stock
Both Steve Wieczynski of Stifel and Carlo Santarelli of Deutsche Bank raised their targets on DraftKings based on higher estimates after the second-quarter earnings release but maintained their hold ratings.
Wieczynski raised his target to $32 while Santarelli’s target went to $27.
Wieczynski pointed to the risk of market-share compression as DraftKings continues to rationalize costs including customer acquisition spend. Also more entrants with money to spend will join the US and other competitors could start to catch up on product in explaining his hold rating.
Santarelli said his hold rating is because DraftKings shares remain “healthily valued” right now.
Wieczynski takes stock of DraftKings competition
DraftKings has been winning share with its improved product, which should only continue once NFL betting picks up, Wieczynski said. But he outlined some concerns about “meaningful tech improvements” from a few competitors:
- Fanatics can start working on the integration of PointsBet once the first stage of the acquisition closes this month.
- Caesars is rolling out a native iOS app with an in-house player account management (PAM) system and shared wallet for next year.
- PENN Entertainment‘s ESPN Bet will be on its proprietary technology.
- BetMGM‘s pricing will benefit from the Entain acquisition of Angstrom.
Despite those points, Wieczynski said it will be tough for anyone to take online share from DraftKings and FanDuel without “outsized” marketing and promotions, or impactful product innovation.
Santarelli: legacy state growth to slow
Management emphasized how growth from older states is helping fund the expanding business, but that growth may slow, Santarelli suggested.
The growth has come from a mix of organic growth, increased hold, market share gains and fewer promotions, he said. The industry saw structural hold increases begin in the second half of 2022, which means legacy state growth should “slow materially” in the second half of this year, Santarelli added.
That dip could “influence investor psyche,” Santarelli said.
Updated EBITDA estimates
DraftKings expects its first full year of positive EBITDA to come in 2024:
| 2023 | 2024 | 2025 | 2026 | |
|---|---|---|---|---|
| Jonas | ($192.8 million) | $384.6 million | $944.4 million | N/A |
| Santarelli | ($167.7 million) | $291.0 million | $855.2 million | $1.013 billion |
| Wieczynski | ($200.0 million) | $197.1 million | N/A | N/A |
